If your small business has employees working in North Carolina, you’ll need to pay North Carolina unemployment insurance (UI) tax. The UI tax funds unemployment compensation programs for eligible employees. In North Carolina, state UI tax is just one of several taxes that employers must pay. Other important employer taxes, not covered here, include federal UI tax, and state and federal withholding taxes.
Different states have different rules and rates for UI taxes. Here are the basic rules for North Carolina’s UI tax.
As a North Carolina employer subject to UI tax, your small business must establish a North Carolina UI tax account with the North Carolina Division of Employment Security (DES). You set up your account by registering your business with the DES either online or on paper. Once registered, you’ll be issued a North Carolina unemployment insurance tax number. Both online and paper registrations use Form NCUI 604, Employer Status Report. To register online, go to the Form 604 online application webpage on the DES website. To register on paper, you can download Form 604 from the forms download page of the DES website. There is no fee to register your business with the DES.
Note: To establish your North Carolina UI tax account, you’ll need a federal employer identification number (EIN). You can apply for an EIN at IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
In general, a North Carolina for-profit employer is liable for state UI taxes if, during a calendar year, the employer either:
These are effectively the same rules that apply for liability under the Federal Unemployment Tax Act (FUTA). Different rules, not covered here, apply to agricultural workers, domestic (in-home) workers, and employees of some (but not all) non-profit organizations.
UI tax is paid on each employee’s wages up to a maximum annual amount. That amount, known as the taxable wage base, increases slightly each year in North Carolina. Recently it has been around $22,000.
By contrast, the UI tax rate for new employers, also known as the standard beginning tax rate, has remained constant for many years at 1.200%. However, this rate is always subject to change. Established employers are subject to a lower or higher rate than new employers depending on an “experience rating.” This means, among other things, whether your business has ever had any employees who made claims for state unemployment benefits.
Unlike other states, North Carolina currently also charges a 20% surtax for the state’s Unemployment Insurance Reserve Fund. This surtax will be imposed until the amount in that fund equals or exceeds $1 billion. The state does not expect to reach this amount, and cancel the surtax, before 2017 at the earliest.
For an overview of the latest rate and wage base information, check DES’s online FAQ page.
One piece of good news is that state UI tax payments generally can be credited against your FUTA taxes. In most other states 100% of the payments can be credited, but in North Carolina only 83.33% can be credited while the surtax for the Unemployment Insurance Reserve Fund is in effect.
In North Carolina, UI tax reports and payments are due by the last day of the month following the end of each calendar quarter. In other words, reporting and payments are due by the following dates:
You can report and pay on paper or online. To file on paper, use Form NCUI 101, Employer’s Quarterly Tax and Wage Report. You can download blank copies of this form from the forms download page of the DES website. Enclose your payment with your report. To file online, you’ll need to create an online account with the DES, and then login to that account to file your report and make a tax payment. You can create an online account by going to the Employer Services section of the DES website. You can make online payments with an e-check, a credit card, or by Automated Clearing House (ACH).
You are required to post a notice (poster) regarding state unemployment insurance in a conspicuous place for all employees. The poster provides basic information about when employees may be eligible for UI benefits and who to contact if they become unemployed. You can download Form NCESC 524 from the Posters section of the North Carolina Department of Labor website. Form NCESC 524 meets the legal requirements for the notice.
Employers who use independent contractors rather than hiring employees are not subject to the UI tax. However, it’s important that you do not misclassify an employee as an independent contractor. If you do misclassify an employee, you could be subject to penalties or fines.
You may decide that it’s easiest to hand over responsibility for payroll, including UI taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of North Carolina UI taxes. Avoid possible penalties for making mistakes by checking both the IRS and DES websites for the latest information. In addition to state UI tax, employers have other responsibilities not covered in this article, such as federal UI tax, state and federal withholding taxes, and required reporting of new hires. You can get more information about other small business tax issues in other articles here on Nolo.com.